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Are Chinese Exports Indispensable For The American Dream?

For record, Chinese exports to the United States are expected the breach the $500 billion level in calendar year 2018. The country is Americas largest import partner and as we will see later in this story – the former maintains a significant influence on the latter’s household consumption basket. If you are still not impressed, then let’s look at the shear significance of the number by comparing it with high frequency macroeconomic data.

For starters, the number $500 billion amounts to nearly 22% of the entire US imports for a year and represents nearly 2.5% of the annual US Gross Domestic Product (GDP). It amounts to America’s entire current account deficit for a year and is also equivalent to 80% of the incremental GDP generated this year. Moreover, 42 out of 56 US states & territories have a GDP size smaller than this value, that is generated by the Chinese exporters from America.

So what are the implications of the US-China trade war

At nearly $250 billion, it is clear that 50% of this number will be impacted by the current US-China trade war. President Trump Administration considering an incremental 10-25% tariff on $250 billion worth imported items from China will surely shake up confidence of traders. And it’s not only businesspeople, who will be impacted but the entire eco-system, given the quantum under consideration. Considering this development, rising inflation is a very realistic expectation.

It should be understood that actual Consumer Price Index (CPI) is continuously overshooting the estimates since the end of 2016. In fact, in the year 2017, recorded CPI came at 2.1%, almost 50 bps over the anticipated number. In 2018, year to date, the print has already breached the estimate by nearly 40 bps. Assuming the commodity price volatility in the global market and a very strong consumption function in the US domestic market - the inflation print is expected to remain strong in much of 2020 and 2021. The four-year low unemployment state and significant credit offtake fueling domestic capacity augmentation only furthers the argument here. The situation augers two things: first, the rate hike cycle could be expedited, making credit expensive and second, households reducing consumption of seemingly essential items until off course, a viable option is available.

While the embargo on Chinese items is not the only variable blamed for higher inflation, insecurities are certainly not unwarranted. A macro level analysis of the US CPI basket reveals that Chinese exports influence almost 30% of all items or services consumed by an average American household. Collectively these households in turn exert an enormous influence on the American economy. This is because American private consumption is worth $13.8 trillion, which is larger than any other country’s GDP on earth. Feeding this insatiable appetite requires substantial backward-forward linkages and there are not many countries capable of mobilizing this level of resources. China’s highly diversified economy is probably the only eco-system capable of matching American demand for not only quantity but standardized quality at a massive scale.

Look at it this way, among all of America’s trading partners, imports from China form one massive monolith worth half a trillion dollars. Canada and Mexico, which come at second and third positions collectively contribute to around $600 billion – giving us a fair idea about China’s scale.

Coming back to the US CPI basket, items which will be massively impacted from tariff rise include average consumable items such as Tools & Hardware, Toys & Recreational Commodities, Appliances (Household Equipment), Apparel, Foot-ware and Auto Ancillaries. Even though it is not clear whether food Items, which have a weight of 13.2% in the overall basket will be impacted directly – there will be ramifications nonetheless. However, sectors such as Appliances (weight of 3.3%), Auto (weight of 3.7%) and Apparel (weight of 3%) will surely make household pockets shallower in the coming quarters.

No alternatives. What to expect now?

Since markets are forward looking, anticipation of price increases will only become starker going forward. It is very unlikely that businesses will absorb these escalated costs on their books and will certainly offload the margin eating charges to the end consumers. Obviously, given the scale involved here along with the acquired capabilities of Chinese suppliers, there is little American businesses can do. Understandably, there aren’t many options available either. Countries which can potentially take over a portion of the Chinese trade are India and Vietnam. Again an unrealistic expectation, given India’s exports to the US is just a tenth of China’s; the story with Vietnam remains the same.

It is therefore prudent to not underestimate the importance of China in the American dream. While tariffs may support import substitution in the medium to long term, common households will have to bear the brunt of this reorientation. No free lunches then? Well that is clearly debatable.

I am an the Lead Economist at Acuité Ratings & Research. As an economist and financial journalist, I have over a decade of experience in covering emerging markets. In the…

I am an the Lead Economist at Acuité Ratings & Research. As an economist and financial journalist, I have over a decade of experience in covering emerging markets. In the year 2014, I authored the business book, “The India Collective-What India is all about,” published by Knowledge World Publishers, New Delhi. In the year 2013, I was adjudged a Prize Finalist for the IE Business School Prize for Economic Journalism in Asia. My specialization includes emerging markets, macroeconomics, public policy and geo politics. I hold an M.A. from the Columbia University, where I was a Hearst Fellowship Fund Scholar and John Curley Annual Fund Scholar.